Wednesday, March 26, 2008

This blog is three years old today! Time sure flies when you're having fun! The terrible twos are now history and, before you know it, I'll be asking for the keys to the car.According to Wikipedia, the phallic-oedipal phase follows right on the heels of the "terrible twos" and this new period is "object-centred, characterized by possessiveness of the parent of the opposite sex and jealousy and rivalry with the same sex parent. The child becomes aware that there are aspects of the relationship between the parents from which he is excluded."

Excluded? ... Me? ... Waaaaah!!

The Mess is in the News

Apparently this humble little "blog with a birthday" was mentioned on American Public Media today (hat tip SL). Will Wilkinson, an obviously uptight research fellow at the Cato Institute (the tip-off was that he still refers to Alan Greenspan as "the Maestro" in a manner completely devoid of sarcasm), thought maybe the Time Magazine's Blame-O-Meter wasn't the best tool to help understand why we are in such a mess these days.

Many people point the finger at former Fed chief Alan Greenspan, the Maestro himself. He kept interest rates low, and encouraged techniques to make mortgages accessible to more people. By doing so, the argument goes, Greenspan practically blew the housing bubble with his own breath and should have seen it coming.

One financial analyst has created a blog devoted exclusively to blaming Greenspan. It's called "The Mess that Greenspan Made."

But Monday morning quarterbacking is a bit too easy, isn't it? If Greenspan really should have seen it all coming, shouldn't Wall Street have seen it coming, too? But instead of getting rich from their foresight, they got crushed under their "collateralized debt obligations."

Hmmm... financial analyst... me-likey.

Maybe I should take back that part about Will being uptight ... Nah!

Actually, it was good timing that this issue was raised again today - as part of this three-year anniversary post - because there is an all-too-common impression that Wall Street is run by mature individuals.

It's not!

I've never been there or met anybody who works there but, as far as I can tell from what I read in the newspapers, it's just a bunch of three-year olds who run the place. A bunch of three-year olds who will run their tricycles straight into the side of the house if their parents don't keep an eye on them.

In this analogy, the parents are the Federal Reserve and other regulatory agencies that were apparently not paying much attention to junior and his hot new wheels.Memories...

Oh well, enough of that. It's time for the obligatory re-reading of the very first post, the Stephen Roach classic It Didn't Have to be this Way. Here it is in its entirety:

An appropriate first post - Stephen Roach hits another home run with his latest missive "The Test". The last paragraph serves as an excellent premise for this blog:

"It didn’t have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster -- the asset-dependent American consumer and a co-dependent global economy that can’t live without excess US consumption. The real test was always the exit strategy."

Yes, it's easy on the way up. Ever increasing liquidity to meet every emerging problem and everyone gets rich - not rich in the old sense, of course, with higher real income and savings, but through higher asset prices for stocks and homes.

"Asset markets around the world are now quivering at just the hint of an unwinding of this house of cards. And they quiver with the real federal funds rate barely above zero. What happens to these markets and to an asset-dependent US economy should the Fed actually complete its nasty task of taking its policy rate into the restrictive zone? "

All aquiver, that's right. Paul Volker must be so proud of his successor ... about to bring down the whole house of cards with quarter point increases to the Fed Funds rate in the low single digits.

"I still don’t think America’s central bank is up to the task at hand. In the face of disruptive markets or growth disappointments, this Fed has repeatedly opted to err on the side of accommodation. I suspect that deep in its heart, the Federal Reserve knows what’s at stake for the US -- and for the world -- if the asset-dependent American consumer were to throw in the towel. "

This is my central belief on this issue, and the motivation for this blog - that given the choice of some economic pain and a long slow death by inflation, the Fed will opt for the latter. It will never be able to raise interest rates like Paul Volker did, in order to put this fiat currency system back on a track that is sustainable for another generation or two - instead, we will continue to swim out to the deep water and hope for the best.

Yes, three years ago - March of 2005 - the problems were painfully clear to some of us while nearly everyone else was going Ga-Ga over real estate and marveling at how wealthy we had all become while the Fed chairman was extolling the virtues of "financial innovation" as it relates to mortgage lending.

Dan? You commented on this first post three years ago. Are you still around?

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comments:

sw
said...

I continue to read this blog daily and think that the author is very insightful and intelligent. With that said, I have to comment on the changes I feel have been going on around here. This blog has become quite self-obsessed. Constant "greenspan mess" sightings and now celebrating a birthday? Come on, who are these posts for? The readers or the author? I don't want to say that its "wrong" to have some self-referential posts, but I think that those posts provide the least value to the readers. I hope to see this blog return to concentrating on analysis and insight of our current economic problems.

In March of '05, I had just moved back to CA after having spent 5 years in "fly-over" country. I had buried my head in the sand, as far as economics were concerned, during the time I lived outside of CA because I just didn't care and really didn't have to. When I moved back, I couldn't afford to buy a house and rents were astronomical - still are. I think they're insane and I have a decent job managing software development at a mid-size company. Well, when I had first moved back to CA I was pretty pissed off and wanted to understand what the hell happened to prices in CA. In my search of the internet, I actually typed in, "the mess that greenspan made", which is how I stumbled upon the site. I remember it because I was just flabbergasted that virtually any name you can think of is taken on the internet - mostly by squatters. I also think that folks in southern CA became significantly stupider while I was away - I seriously feel that some sort of poisoning must have happened here to make the collective IQ plummet so dramatically; either that, or I've experienced some sort of tumor that has made me significantly smarter : )

Congratulations on three years of stellar content. Your writing has been such a resource for myself, and TMTGM was one of a few blogs that inspired me to wriye my own and try to wake people up. Thanks for the site, happy birthday!

The Cato Institute is a strange animal. Despite touting itself as a bastion of libertarianism, some of their research fellows seem decidedly statist. How could a libertarian be happy with Greenspan or Bernanke's Fed? Wouldn't they want markets to operate freely, rather than having investors with their ears constantly pressed to the ground to predict and react to Fed moves? The Ron Paul outlook on the Federal Reserve seems far more pure from a libertarian perspective than what Wilkinson writes. Even without calling for the abolishment of the Fed, you'd think a libertarian would support market manipulation only when absolutely necessary.

As for the self-indulgent posts, I don't mind them at all. When I first started reading this blog a year and a half ago, when Tim was still in the 8-5 set, sometimes there were only a few posts per week. Now there are a few per day. With that kind of volume it's hard to be annoyed by occasional self-referencing.

I heard a Cato institute fellow on the Neal Boortz radio show last week saying that our inflation was "well under control". After that I didn't bother listening to anything he was saying. Obviously he's drinking the cool aide given by the govn't statisticians.

I enjoy the blog, found it a few weeks back and try to check it daily. Keep up the good work.